ECONOMYNEXT – Sri Lanka will soon ban open account imports in a bid to end demand for unofficial transfers made through Undiyal/Hawala gross settlement systems, Central Bank Governor Nandalal Weerasinghe has said.
“We are seeing a significant volume of money flowing through the Hawala/Undiyal systems,” Governor Weerasinghe said.
“Sometimes it’s for imports that aren’t essential.”
Weerasinghe said the Ministry of Finance will soon publish a notice in the Official Gazette through the Import and Export Control Act.
About 25% of the country’s $1.6-1.8 billion a month is in open account and about 12% in documents against payment/documents against acceptance, central bank officials said.
The Import and Export Control Act was enacted in 1969 when economists/mercantilists printed money through the island’s middle regime central bank and frustrated an administration run by Prime Minister Dudley Senanayake.
Sri Lanka’s parallel rates for Undiyal transfers are around 400 rupees per dollar or more, compared to around 365 rupees per US dollar for the banking system where there are currency shortages.
Currency shortages are caused by the printing of extra money by the central bank, which drives up credit and imports.
Parallel exchange rates appear when rupees trying to rush out of the country are higher than inflows.
Currently, there is a buy-back requirement (central bank purchases of dollars for new currency despite the struggling exchange) which critics say tends to push the currency down.
However, Governor Weerasinghe had made the right decision by raising rates from 7.50% to 14.50% and Treasury bond yields are now around 22%, which will eventually dampen bank credit and imports. .
However, concerns have been raised that any attempt to force food importers to open a letter of credit before private credit collapses could lead to food shortages, such as those found in medicines and fuel. .